Question
Recently,youaretaskedbyyourmanagertoevaluatetheinvestmentpotentialof2stocks,StockAand Stock B.Thecost ofequityis 8%forboth StockAand Stock B. Thefollowingexpecteddividendpaymentsforthefollowingyearsareasfollow: ExpectedDividend Year StockA StockB 1 $5.00 $2.00 2 $6.00 $3.00 3 $6.20 $4.00 4 $6.40 $4.20
Recently,youaretaskedbyyourmanagertoevaluatetheinvestmentpotentialof2stocks,StockAand Stock B.Thecost ofequityis 8%forboth StockAand Stock B.
Thefollowingexpecteddividendpaymentsforthefollowingyearsareasfollow:
ExpectedDividend | ||
Year | StockA | StockB |
1 | $5.00 | $2.00 |
2 | $6.00 | $3.00 |
3 | $6.20 | $4.00 |
4 | $6.40 | $4.20 |
5 | $6.60 | $4.40 |
- Estimate the dividend growth rate from year 6 onwards for both stocks . Justify your estimation approach.
(5marks)
- UsingGordonDividendGrowthModeandyourestimationofthedividendgrowthrates,determinethevalueofStock Aand B.
(10marks)
- Whichstockshouldyourecommendforinvestment?Justifyyourrecommendations.
(5marks)
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Financial management theory and practice
Authors: Eugene F. Brigham and Michael C. Ehrhardt
13th edition
1439078106, 111197375X, 9781439078105, 9781111973759, 978-1439078099
